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President Obama Calls For a One-Year Extension of the Current Tax Breaks
As the temperatures start to rise in July 2012, so does Congressional posturing over the future of federal tax policy. Both the Democrats and the Republicans are on record as being in favor of tax reform, but they remain far apart on just what type of reform is best for the country. This issue will highlight some of the present differences in their respective tax reform visions as demonstrated by the bills they have most recently introduced. We will also discuss the increase in Medicare taxes facing many Americans beginning in 2013, now that, at least for the present, the Patient Protection and Affordable Care Act (sometimes referred to as the 2010 Health Care Reform Act) is still with us, based on the recent decision of the U.S. Supreme Court upholding the Act's constitutionality.
President Obama Calls For a One-Year Extension of the Current Tax Breaks Afforded to the Middle Class
– In a speech given on July 9, 2012, President Obama has called on Congress to quickly pass a one-year extension of the 2001 and 2003 Bush-era income tax rates – but only for those families earning no more than $250,000 a year. In the speech, President Obama stated, "Let's not hold the vast majority of Americans and our entire economy hostage while we debate the merits of another tax cut for the wealthy". David Plouffe, senior adviser to President Obama, confirmed on July 10, 2012 that the President would veto any legislation that extends the 2001 and 2003 Bush-era income tax rates for the wealthiest 2% of Americans. Jay Carney, the White House Press Secretary, amplified this position by telling the assembled press that although President Obama still supports a permanent extension of the present tax rates for the middle class, a one-year extension at least provides certainty for another year.
Democrats and Republicans Headed For Possible Tax Showdown in Early August
– At the present time, the leaders in the U.S. House of Representatives and the U.S. Senate are each moving forward with their respective, but divergent, plans for addressing the future of the Bush-era tax cuts. If Congress does nothing, these tax cuts are set to expire on January 1, 2013.
In the House, Republicans will offer bills to extend the 2001 and 2003 Bush-era income tax cuts for all taxpayers (including even the "wealthiest 2% percent"), as well as the current estate tax rate structure, for one year, and set up a process for overhauling the tax code. In the Senate, Democrats are poised to put forward a bill that will extend the Bush-era income tax cuts only for families earning no more than $250,000. Their bill does not address the future of the federal estate tax, which, if no action is taken this year, will revert back on January 1, 2013 to a maximum tax rate of 55% and an exemption level of $1,000,000. The Republicans in the Senate have already gone on record opposing any bill that seeks to raise taxes on "any household".
The bill being proposed by the Democrats in the Senate would do the following:
The Bush-era tax cuts would be extended only for individuals earning less than $200,000 per year ($250,000 for couples filing jointly) and would reinstate the personal exemption phase out and overall limitation on itemized deductions for that same category of high-income taxpayers.
The top tax rate for dividends and capital gains would be set at 20%.
The American Opportunity Tax Credit, the Child Tax Credit, and the Earned Income Tax Credit, as well as Section 179 expensing provisions for businesses, would be extended for 2013.
An alternative minimum tax patch for middle class taxpayers would be enacted for the 2012 tax year.
Sales Taxes on Internet Purchases?
– On July 18, 2012, Senate Majority Whip, Richard Durbin (D-IL), said that he hopes that legislation he has proposed to require internet sellers to collect state sales taxes will be considered by the Senate this year. But, realistically, Senator Durbin has stated that the bill probably will not be considered until sometime in 2013. Senator Durbin initially introduced the Main Street Fairness Act (S. 1452) in July 2011. The bill would allow states that have signed on to the Streamlined Sales and Use Tax Agreement to require collection of sales taxes on internet-based sales, while setting a threshold of $500,000 in sales before a company would be required to collect sales taxes on these types of sales.
Be Aware of Medicare Tax Increase in 2013 on Unearned (i.e., Net Investment) Income
– Coming January 1, 2013, individuals, estates, and trusts will face a new tax which is imposed under the 2010 Health Care Reform Act. For individuals, the new Medicare tax is equal to 3.8% of the lesser of (i) the individual's "net investment income", or (ii) the excess of the individual's "modified adjusted gross income" over the applicable threshold amount. The threshold amount is $250,000 for married filing jointly returns (or returns filed by surviving spouses), $125,000 for married filing separately returns, and $200,000 for other returns.
: Some in the real estate industry have voiced alarm that this new 3.8% tax will be imposed on the gross proceeds received by sellers of personal residences. This is simply not true. The new 3.8% Medicare tax applies to "net investment income". In addition, only the "taxable" gain (not the entire sales proceeds) on the sale of a house will be part of the taxpayer's "net investment income" subject to the 3.8% tax. Consequently, since all or a part of the gain on the sale of a taxpayer's "principal" residence (as much as $500,000 for married taxpayers filing jointly) may be (if certain conditions are met) excluded from the taxpayer's taxable income for federal income tax purposes, such excluded gain is not treated as "net investment income" for purposes of the new 3.8% tax.